Note: the decision in this case
has now been overruled by the Court of Appeal in a judgment delivered on 17
December 2003. To access the note on the Appeal decision, click here

DMC/INS/03/02Drake Insurance Plc -v- Provident Insurance Plc
English High Court: Moore-Bick J.:3 February 2003Christopher Purchas QC and Steven Snowden, instructed
by Barlow Lyde & Gilbert, for Drake Insurance
Robert Moxon-Browne QC and Alexander Hill-Smith instructed by Greenwoods for
Provident InsuranceMOTOR INSURANCE: CONTRIBUTION FROM ANOTHER INSURER: ACCIDENT DECLARED AT
INCEPTION INCORRECTLY AS "FAULT" ACCIDENT: SPEEDING CONVICTION NOT
DECLARED ON RENEWAL: INSURERS AVOID POLICY FOR NON-DISCLOSURE: COMBINATION OF
FAULT ACCIDENT AND SPEEDING CONVICTION WOULD HAVE LED TO INCREASED PREMIUM: HAD
FAULT ACCIDENT BEEN CORRECTLY DECLARED AS "NO FAULT", SPEEDING
CONVICTION ALONE WOULD NOT HAVE LED TO INCREASED PREMIUM: DUTY OF UTMOST GOOD
FAITH: WHETHER INSURERS OBLIGED TO REINSTATE POLICY ONCE TRUTH KNOWNSummary
This motor case is interesting because it involves disclosure of information
that was, in fact, incorrect, combined with the non-disclosure of a material
fact that, on its own, would not have entitled the insurer to avoid the policy.
One of the arguments raised (relying on the controversial decision in Strive
Shipping Corporation and Royal Bank of Scotland plc v Hellenic Mutual War Risks
Association - the "Grecia Express")was that, because the information later
proved to be incorrect, it would be a breach of the insurer's duty of good faith
to persist in the avoidance.

DMC’s Category Rating

: Developed

This case note is based on an Article in the January 2003
Edition of the ‘Bulletin’, published by the Marine and Insurance teams at
the international firm of lawyers,

Background
In July 1996, a car driven by Mrs Kaur was involved in an accident with a
motorcycle. The motorcycle rider was seriously injured and claimed compensation.
The car belonged to Mrs Kaur's husband, Dr Singh, who was insured by Provident
Insurance. Mrs Kaur was a named driver under that policy, but she also owned a
car of her own, insured by Drake Insurance. That policy indemnified her against
liability to third parties when driving another vehicle with permission of the
owner.

Dr Singh claimed under the Provident policy, but Provident
avoided the policy for non-disclosure. Mrs Kaur made a claim under her own
policy with Drake, who eventually paid up. Drake then claimed against Provident
for a contribution on the grounds that Provident had no right to avoid the
policy, and that, since both companies were liable to indemnify Mrs Kaur, this
was a case of double insurance of the same risk.

When Dr Singh first took out the Provident cover in 1995, he
named Mrs Kaur as an additional driver and disclosed the fact that she had been
involved in an accident in 1994. The proposal form, completed electronically by
the broker, indicated that Mrs Kaur had been at fault in that accident. Dr Singh
signed a hard copy of the form, which was then submitted to the insurer.

In December 1995, Dr Singh committed a speeding offence, for
which he received a fixed penalty and an endorsement on his licence. But he
failed to disclose this when he renewed his policy with Provident in February
1996. Provident only got to know about it when he sent in a copy of his driving
licence after the accident in July 1996. It then avoided the contract for
non-disclosure.

Because of the way Provident underwrote motoring risks, neither
incident, on its own, would have affected the premium charged. The insurer
operated a streamlined system, whereby demerit points were awarded for accident
and motoring offences. The "normal" premium would only be increased if
the total number of points exceeded 16. In this case, Mrs Kaur’s 1994 accident
scored 15 points and so Dr Singh was charged a normal premium. Had his driving
offence been disclosed, however, it would have added a further 10 points,
increasing the premium by 25%.

Only accidents categorised as "fault" or "partial
fault" attracted points for this purpose. A "no fault" accident
was ignored. Unfortunately, Mrs Kaur’s 1994 accident had been wrongly
described on the proposal form as a fault accident. Had Provident been correctly
informed, the accident would not have added any points to the total. If Dr Singh
had then disclosed his speeding offence, he would only have been allocated 10
points and charged the normal premium.

If Drake was to succeed in its claim for a contribution, it had
to show that Provident had a liability under its policy to meet the claim - in
other words, that it had not been entitled to avoid.

A speeding conviction is a material fact but, for an insurer to
be entitled to avoid, it must also show that the non-disclosure induced it to
accept a risk it would otherwise have declined, or which it would have accepted
only on less favourable terms (Pan Atlantic Insurance Co Limited -v- Pinetop
Insurance Co Limited [1995] 1 AC 501).

Drake argued that the non-disclosure had not induced a contract
on more favourable terms. Had the information about the 1994 accident been
correct, Provident would have charged Dr Singh the normal premium, whether or
not it had known of his speeding offence. Even if Provident had been entitled to
avoid, it would be a breach of its duty of utmost good faith to continue with
the avoidance, now that the information had been shown to be wrong.

This last point relied on the judgment of Mr Justice Colman in
Strive Shipping Corporation -v- Hellenic Mutual War Risk Association (The Grecia
Express) [2002] 2 Lloyd’s Rep 88. That case concerned the insured's duty to
disclose the existence of suspicious circumstances relevant to moral hazard. The
judge held that, although the insured is under a duty to disclose allegations of
dishonesty or criminal conduct (since these are material), if he succeeds at
trial in establishing that the allegations were unfounded, it would be a breach
of the insurer's duty of utmost good faith to persist in avoiding the contract.

This decision has caused some concern in the insurance world,
since it appears to introduce an unwelcome element of hindsight into the
question whether or not an insurer is entitled to avoid a policy.

Judgment
Despite Drake’s arguments, Mr Justice Moore-Bick found that Provident had
been entitled to avoid the contract. An insurer can only assess a risk on the
basis of the information provided, and Provident had been informed that there
had been a fault accident in 1994. Dr Singh’s subsequent failure to disclose
his speeding offence, therefore, had caused Provident to renew the policy on
more favourable terms than it would otherwise have done because it charged him a
normal rather than an increased premium.

As for the Strive Shipping argument, the judge was not persuaded
that the court had power to declare that a right to avoid has been lost
retrospectively. Avoidance takes immediate effect. If the right to avoid has
arisen, and if it has been exercised in good faith on sufficient grounds, that
avoidance cannot subsequently be invalidated by receipt of further information
so that the insurer has to reinstate the contract.

Drake also argued that Provident had waived its right to avoid
because it had accepted further premiums by direct debit after it had informed
Dr Singh of its avoidance of the policy in August 1996. All premiums paid after
July 1996 were eventually refunded in December 1997.

The judge, however, did not think this was sufficient to
constitute a waiver. Once an insurer has avoided the policy, the only way in
which it can lose its right to treat the policy as rescinded is by agreeing to
reinstate it in such a way as would prevent it from relying on its earlier
decision. But throughout the correspondence, Provident had never given any
indication that it was entering into any agreement to reinstate the original
cover or handle the accident claim. The avoidance, therefore, held, and Drake’s
claim for a contribution failed.

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